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BofA goes on offensive despite $1.8bn quarterly loss

Bank of America on Friday declared a fourth-quarter loss of $1.8bn (€1.3bn) and went on the offensive to answer critics and garner support during a time of crisis.

The loss, the first for BofA since its predecessor NCNB registered a loss in 1991, was down from a net income of $268m a year earlier. The Charlotte-based lender took an $8.5bn provision for bad loans during the period - up from $3.3bn a year ago.

BofA also unveiled markdowns and trading losses in its capital-markets operations - including losses on collateralised debt obligations of $1.7bn and write-offs on commercial mortgage-backed securities of $853m.

Comment: Lewis' most important shareholder, the feds, believe that the way to calm financial markets is to force US’ biggest, and a heretofore healthy, bank to absorb toxic assets it didn't want.

And the BofA chief doesn't seem thrilled that the government now controls a larger stake in his firm. BofA investors would readily agree - the lender’s stock price plunged 14% on Friday. This, surely, isn't the way to attract private capital to the banking system, which the feds apparently want to.

BofA, whose net revenue during the quarter increased 19% to $15.9bn from $13.4bn a year earlier, attributed the earnings to “the deepening economic recession and extremely challenging financial environment, both of which significantly intensified in the last three months of 2008”.

The firm said Merrill Lynch posted a fourth-quarter net loss of $15.3bn, or $9.62 per diluted share, “driven by severe capital markets dislocations,” before the takeover’s completion.

Overall for 2008, BofA recorded a net profit of $4bn compared with net income of $14.9bn a year earlier.

BofA will take the first $10bn hit on a pool of $118bn of toxic assets - primarily mortgage-related securities inherited from Merrill - and the Treasury and FDIC the next $10bn. The Federal Reserve will extend a loan to help absorb 90% of the subsequent losses.

Comment: Lex

Lewis now faces a really daunting year, as he has to somehow contain the damage from a hasty and overpriced deal. The $19bn acquisition lost nearly $15bn in the fourth quarter, and this represents a devastating blunder that puts Lewis’ position in doubt.

In exchange for the federal rescue, BofA will issue $4bn of preferred shares yielding an 8% interest and pay 8% annually on the $20bn. Moreover, it will issue further warrants and slash its dividend and impose tougher restrictions on executive compensation.